TFSAs

Tax Free Savings Accounts (TFSAs)

TFSAs

The Tax Free Savings Account (TFSA) allows you to save money each year without paying any tax on the investment income (interest, capital gains or dividend income) you earn.

There are so many things you can save for by using a TFSA. It might be to renovate your home, buy a cottage, go on a vacation or save for your child's wedding or your retirement. It could even be just to have emergency funds readily available.

The Basics

To open a TFSA, you will need:

  • A valid Canadian Social Insurance Number
  • To be at least 18 years old
  • To be a Canadian resident

Key facts

Contribution Deadline
  • December 31 for that calendar year
Contribution Limit
  • $6,000 for 2019
  • The Canada Revenue Agency (CRA) will track your contribution room. CRA reports this amount to individuals through the 'My Account' function on the CRA website
Carry Forward
  • TFSA contribution room can be carried forward indefinitely to subsequent years
Eligibility
  • A valid Canadian Social Insurance Number
  • To be a Canadian resident
Government benefits
  • Since TFSA withdrawals are not considered income for tax purposes, there is no impact on government benefits
  • Your TFSA will not affect your eligibility to receive benefits such as the Guaranteed Income Supplement, Canada Child Tax Benefit or Old Age Security benefits, etc.
Minimum Age
  • 18 years
  • You cannot contribute retroactively for the years prior to 18 years of age.
Maximum Age
  • No maximum age
Spousal Contribution
  • Spouses (and common-law partners) can give each other money to contribute to their own TFSA as long as it is within the maximum allowed
  • TFSA assets can be transferred to a spouse tax-free upon death
Overcontribution penalty
  • 1% per month on overcontribution amounts (even if the contribution was withdrawn in the same tax year)
Tax Features
  • Account is funded with after-tax dollars
  • Earnings growth is tax-sheltered
  • Withdrawals from the account remain tax-free
Type of investments
  • Wide range of investments, including mutual funds and exchange-traded funds
Withdrawals
  • You can withdraw your savings tax-free at any time and for any purpose
  • Any amount withdrawn from a TFSA is added to your contribution room for the following year and can be carried forward indefinitely to subsequent years
  • TFSA vs RRSP?

    •  Which makes more sense? With both, your investment growth is tax-sheltered, but there are important differences:

      Product feature TFSAs RRSPs
      Annual contribution limit $6,000 for 2019 For 2018, 18% of income or $26,230, whichever is lower (increased annually)
      Tax-deductible contribution No Yes
      Contribution carry-forward Yes Yes
      Taxable consequences No tax on growth and no tax on any withdrawals Withholding tax applies if withdrawn prior to RRIF; the amount withdrawn is added to taxable income
      Maximum age for contributions No Yes (71 years old)
      Re-contribution of withdrawals Yes (in subsequent calendar year) No (except for Home Buyers’ Plan and Life Long Learning Plan)
      Overcontribution penalty Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in the same tax year) Yes, 1% per month if you exceed the $2,000 lifetime over-contribution amount

       

      Basically RRSPs save you taxes now and TFSAs save you taxes later.

       

      TFSA

      RRSP

      Pre-tax income

      $1,000

      $1,000

      Income tax paid (at 40%)

      $400

      n/a

      Amount invested

      $600

      $1,000

      Value after 20 years (assuming 5.5% growth)

      $1,751

      $2,918

      Tax due when the money is withdrawn (at 40%)

      $0

      $1,167

      Cash in hand after 20 years

      $1,751

      $1,751

      Source: AGF Investments Inc. For illustrative purposes only.

       

  • TFSA vs non-registered savings

    • In both accounts, contributions are made with after tax money. However, in a TFSA, any earned interest, capital gains or dividend income remains tax free – but in a non-registered account, any earned income incurs taxes each year.

      Product Features TFSAs Cash Accounts
      Annual contribution limit $6,000 for 2019 No limits
      Contribution carry-forward Yes N/A
      Taxable consequences No tax growth and no tax on withdrawals Fully taxable earnings growth
      Capital loss on Investment Cannot claim Can offset capital gains (three preceding tax years, carried forward indefinitely)
      Re-contribution of withdrawals Yes (in subsequent calendar year) Yes
      Overcontribution penalty Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in same tax year) N/A

       

      Why bother with a TFSA – because tax-sheltered growth can add up 

       

      TFSA

      Non-registered savings

      Initial investment

      $5,000

      $5,000

      Value after 20 years (assuming 5.5% growth and after tax)

      $14,589

      $10,872

      Tax savings

      $3,717

      N/A

      Note: *Investment income earned in the TFSA is not subject to tax therefore the rate of return is 5.5% per year. Investment income earned in the non-registered account is subject to tax at a rate of 28% therefore the after-tax rate of return will be 4% per year (i.e., 5.5%x(1-28%)). The 28% investment tax rate is the weighted average tax rate on an investment portfolio comprised of 30% dividends, 15% capital gains and 40% interest (i.e., (30%+15%+40%)/3).

      Source: AGF Investments Inc. For illustrative purposes only.

  • TFSA Withdrawals

    • You can withdraw your savings tax-free at any time and for any purpose.

      Since TFSA withdrawals are not considered income for tax purposes, there is no impact on government benefits – and your TFSA will not affect your eligibility to receive benefits such as the Guaranteed Income Supplement or Old Age Security benefits.

      So if you’re saving for retirement, a TFSA can help manage your taxable income since withdrawals from an RRSP or RRIF are fully taxable.

Forms

AGF Perspectives

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Government of Canada Links

AGF Resources
Tax-Free Savings Account Fast Facts

The Tax Free Savings Account (TFSA) allows you to invest post-tax money into an account where subsequent earnings growth (interest, capital gains or dividend income) is not subject to further taxation.

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